Loans, Loans, Who's Getting Loans?

As various financial publications have pointed out, there is something on the order of $1.4 trillion in commercial real estate (CRE) loans maturing over the next couple of years. In a strong economy, refinancing would be the order of the day. Values would have increased because rising rents and high occupancy rates would generate greater net operating income.

While there are pockets of relative prosperity, for the broader view the economy is not in good shape. Rental rates have declined and occupancy rates are down. Consequently, the value of many CRE properties has declined, and, in some cases, is less than the amount of the maturing debt. As this debt matures, refinancing in an amount sufficient to satisfy it in full isn't likely. Additionally, the Commercial Mortgage-Backed Securities (CMBS) market is a mere shadow of its former self, and lending institutions seem unwilling to make new loans until they've strengthened their balance sheets.

Still, various pundits note that some properties or portfolios have been refinanced. But, on closer inspection, these situations typically are unique in comparison to the vast number of potential CRE refinancings. These lucky few generally are located in prime areas, are class A trophy structures, and enjoy extremely high rates of occupancy (95%+) by very credit worthy tenants on long-term leases.

The real issue concerns the vast majority of CRE that is not so fortunate as to be in this category. Banks and the FDIC can't afford to pretend and extend indefinitely. Will there be:

• a flood of foreclosures and RTC-like activities?
• a massive amount of loan restructuring?
• fresh capital made available at lower rates of return?
• a development of hybrid solutions not yet seen?

Stay tuned, it's going to get more interesting.